National Amusements, Inc. v. Endurance American Specialty Insurance Company ( 2023 )

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
NATIONAL AMUSEMENTS, INC., )
NAI ENTERTAINMENT HOLDINGS, )
LLC, and SHARI E. REDSTONE, )
) C.A. No. N22C-06-018 AML CCLD
Plaintiffs, )
)
v. )
)
ENDURANCE AMERICAN SPECIALTY )
INSURANCE COMPANY, IRONSHORE )
INDEMNITY, INC., STARR INDEMNITY )
& LIABILITY COMPANY, AND )
NATIONAL UNION FIRE INSURANCE )
COMPANY OF PITTSBURGH, PA, )
)
Defendants. )
Submitted: January 25, 2023
Decided: April 28, 2023
MEMORANDUM OPINION
Upon Plaintiffs’ Motion to Dismiss Counterclaims and Strike Affirmative
Defenses: GRANTED IN PART, DENIED IN PART.
Matthew Fischer, Esquire, Jennifer Wasson, Esquire, Jacqueline Rogers, Esquire,
Carla Jones, Esquire, POTTER ANDERSON & CORROON, LLP, Wilmington,
Delaware, David B. Goodwin, Esquire, COVINGTON & BURLING LLP, San
Francisco, California, Neema Sahni, Esquire, COVINGTON & BURLING LLP,
Los Angeles, California, Mitchell F. Dolin, Esquire, Jad H. Khazen, Esquire,
COVINGTON & BURLING LLP, Washington, DC; Attorneys for Plaintiffs
National Amusements, Inc., NAI Entertainment Holdings, LLC, and Shari E.
Redstone.
Michael Busenkell, Esquire, GELLERT SCALI BUSENKELL & BROWN LLC
Wilmington, Delaware, Manuel Mungia, Jr., Esquire, Matthew E. Pepping, Esquire,
Chad W. Schreiber, Esquire, CHASNOFF MUNGIA VALKENAAR PEPPING &
STRIBLING LLP, San Antonio, Texas; Attorneys for Defendant Endurance
American Insurance Company.
Carmella P. Keener, Esquire, COOCH AND TAYLOR, P.A., Wilmington,
Delaware, Ronald P. Schiller, Esquire, Daniel J. Layden, Esquire, Isabel C. Naveira
López, Esquire, HANGLEY ARONCHIK SEGAL PUDLIN & SCHILLER,
Philadelphia, Pennsylvania; Attorneys for Defendant Ironshore Indemnity, Inc.
Christopher B. Chuff, Esquire, TROUTMAN PEPPER HAMILTON SANDERS
LLP, Wilmington, Delaware, Kevin F. Kieffer, Esquire, Ryan C. Tuley, Esquire,
TROUTMAN PEPPER HAMILTON SANDERS LLP, Irvine, California, Ciaran B.
Way, Esquire, TROUTMAN PEPPER HAMILTON SANDERS LLP, Philadelphia,
Pennsylvania; Attorneys for Defendant Starr Indemnity & Liability Company.
Kurt M. Heyman, Esquire, Aaron M. Nelson, Esquire, HEYMAN ENERIO
GATTUSO & HIRZEL LLP, Wilmington, Delaware, Scott B. Schreiber, Esquire,
Arthur Luk, Esquire, ARNOLD & PORTER KAYE SCHOLER LLP, Washington,
DC; Attorneys for Defendant National Union Fire Insurance Company of
Pittsburgh, PA.
LEGROW, J.
The plaintiffs in this action seek insurance coverage for litigation currently
pending in the Delaware Court of Chancery. The litigation at issue challenges the
fairness of the amount paid in a merger between two companies the plaintiffs
controlled. The defendant insurance companies have denied coverage for several
reasons, including that the current litigation is related to earlier litigation that
challenged several corporate governance decisions plaintiffs undertook to strengthen
their control over the two companies that later merged.
The plaintiffs moved to dismiss the defendants’ counterclaims that are based
on the interrelated claims coverage defense. The plaintiffs also moved to strike the
defendants’ affirmative defenses that are based on the related claims theory as well
as the policies’ prior litigation and prior notice exclusions. The primary question
before the Court is whether dismissal of the counterclaims should be granted before
the defendants have been given access to the unredacted complaints in the
underlying litigation and permitted discovery into the plaintiffs’ other
indemnification claims that allegedly advance a position inconsistent with the
plaintiffs’ current coverage position. The Court concludes dismissal would be
premature on this record and therefore denies the motion as to the counterclaims and
affirmative defenses that are based on the interrelated claims clause and the prior
litigation exclusions.
On the other hand, the defendants have asserted counterclaims and affirmative
defenses based on the policies’ prior notice exclusion, and it is apparent from the
record that the plain language of that exclusion does not apply in this case. The
Court therefore grants the plaintiffs’ motion as to the prior notice exclusion. My
reasoning follows.
FACTUAL AND PROCEDURAL BACKGROUND
Unless otherwise noted, the following facts are not disputed. The plaintiffs in
this action, National Amusements, Inc. (“NAI”), NAI Entertainment Holdings, LLC
(“NAIEH”), and Shari E. Redstone (collectively, the “NAI Policyholders”), are
insured under a tower of directors’ & officers’ (“D&O”) liability insurance policies
issued by the defendants. During the time period relevant to this case, NAI owned
controlling interests in CBS Corporation and Viacom Inc, and Ms. Redstone was a
director of CBS and the primary beneficiary of the trust that controls NAI. NAIEH
is a subsidiary of NAI.
In late 2019, Viacom and CBS merged, forming a new entity known as
Paramount Global. Stockholders of both Viacom and CBS filed actions in the Court
of Chancery challenging the merger price (the “Merger Litigation”), with CBS
stockholders arguing the price was too high and Viacom stockholders arguing the
price was too low. The defendant insurers have denied the NAI Policyholders’
claims seeking coverage for the Merger Litigation under the D&O policies in effect
2
at the time the Merger Litigation was filed. The NAI Policyholders filed this action
seeking a declaratory judgment as to the defendants’ obligation to cover the loss the
NAI Policyholders have incurred or may incur in connection with the Merger
Litigation.
The defendants have asserted various counterclaims and affirmative defenses
in this action, several of which are based on the defendants’ contention that the
Merger Litigation is related to four different actions filed against one or more of the
NAI Policyholders in 2016. Based on their interrelated claims argument, the
defendants contend coverage under the D&O Policies is not triggered or is expressly
excluded.
A. The D&O Policies
The NAI Policyholders seek coverage for the Merger Litigation under a tower
of four D&O policies issued for the policy period of June 30, 2017 to December 30,
2018 and renewed on materially identical terms for the period of December 30, 2018
to December 30, 2019 (the “Policies”).1 NAI expanded its D&O coverage in 2017;
in previous years, NAI’s D&O coverage was subject to a $5 million sublimit for
shareholder derivative claims.
1
The NAI Policyholders seek coverage under NAI’s 2017-18 policies or its 2018-19 policies.
There is no material difference between those policies for purposes of the pending motion, and the
Court therefore does not otherwise distinguish between those policies in this opinion. Unless
otherwise noted, citations to the Policies will be to the 2018-19 Policies.
3
Defendant Endurance American Specialty Insurance Company (“Endurance’)
issued the primary policy, which has a $10 million limit and a $2.5 million self-
insured retention. Defendants Ironshore Indemnity Company (“Ironshore”), Starr
Indemnity & Liability Company (“Starr”), and National Union Fire Insurance
Company of Pittsburgh, Pa. (“National Union” and collectively with Endurance,
Ironshore, and Starr, the “Defendants”)2 issued excess policies of $10 million each
that generally “follow form” to Endurance’s primary policy and afford coverage on
the same terms and conditions unless the excess policy expressly provides
otherwise.3 The Policies are “claims made” policies, which means they provide
coverage for claims first made within the stated policy period.
The Policies require the Defendants to provide coverage for “Loss”4 an
Insured Entity becomes legally obligated to pay on account of a claim for a
“Wrongful Act:”
(B) The Insurer shall pay on behalf of an Insured Entity all Loss which
an Insured Entity has paid as indemnification to, for or on behalf of an
Insured Person and which the Insured Person becomes legally obligated
to pay on account of any Claim first made against any Insured Entity
during the Policy Period or, if applicable, the Optional Extension
Period, for Wrongful Acts.
2
For reasons that are unclear, the NAI Policyholders refer to National Union as “AIG,” but the
Court uses National Union throughout this opinion.
3
For example, National Union’s policy has a prior litigation exclusion that is different from
Endurance’s primary policy.
4
“Loss” is defined broadly in the Policies to include damages, judgments, amounts paid in
settlement, and defense costs.
4
(C) The Insurer shall pay on behalf of any Insured Entity all Loss which
the Insured Entity becomes legally obligated to pay on account of any
Claim first made against such Insured Person, individually or
otherwise, during the Policy Period, or if applicable, the Optional
Extension Period, for Wrongful Acts.5
The Policies expansively define a “Wrongful Act” as:
(a) any actual or alleged act, omission, error, neglect, statement,
misstatement, misleading statement, breach of fiduciary duty or any
other breach of duty committed or attempted, or allegedly committed
or attempted by an Insured Person by reason of his or her capacity as
such; (b) any matter asserted against an Insured Person by reason of his
or her status as such; (c) any actual or alleged act, omission, error,
neglect, statement, misstatement, misleading statement, breach of
fiduciary duty or any other breach of duty committed or attempted, or
allegedly committed or attempted by an Insured Person in his or her
Outside Capacity;16 (d) any matter asserted against an Insured Person
arising out of or by reason of his or her serving or having served in an
Outside Capacity; (e) any actual or alleged act, omission, error, neglect,
statement, misstatement, misleading statement, breach of fiduciary duty
or any other breach of duty committed or attempted, or allegedly
committed or attempted by an Insured Person in his or her capacity as
such Controlling Person or by reason of his or her status as such or
security holder of a Portfolio Company.6
The Defendants’ coverage denials arise in part from the Interrelated Wrongful
Acts clause contained in the primary policy. That clause provides that all claims
arising from “Interrelated Wrongful Acts” constitute a single claim and shall be
deemed to be made in the earliest policy period in which the earliest interrelated
claim was made. Specifically, the clause states:
5
Starr Answer, Affirmative Defenses, and Counterclaim, D.I. 36 (hereinafter cited as “Starr
Answ.”) Ex. B, Management and Professional Liability Coverage Part, § 1 – Insuring Agreement.
6
Id. § II(B).
5
All Claims arising from Interrelated Wrongful Acts shall be deemed to
constitute a single Claim subject to a single Retention and shall be
deemed to have been first made and notice at the earliest time at which
the earliest such Claim is commenced or deemed to have been made
pursuant to GENERAL DEFINITIONS, (E), or, if applicable,
GENERAL CONDITIONS (C)(1) or (C)(2).7
Interrelated Wrongful Acts are defined as “Wrongful Acts that are based on, arising
out of, resulting from, in consequence of or involving any of the same or related or
series of related facts, transactions or events.”8
The Policies also include two types of exclusions that the Defendants have
invoked in their counterclaims and affirmative defenses and that the NAI
Policyholders challenge in their pending motion. First, the Policies contain a “Prior
Notice Exclusion” that excludes coverage for a claim that was the subject of notice
under an earlier policy:
The Insurer shall not pay Loss for any Claim based upon, arising out
of, directly or indirectly resulting from, on consequence of, or in any
way involving any Wrongful Act or Interrelated Wrongful Act which,
before the Inception Date of this Policy, was the subject of any notice
given under any other policy of insurance which this Policy is a renewal
or replacement, but only if coverage is afforded or accepted under such
prior policy (or would have been afforded and accepted except for the
exhaustion of its limits of liability) for such Loss, in whole or in part,
as a result of such notice.9
Second, the excess Policies contain Pending and Prior Litigation exclusions (the
“PPL Exclusions”) that exclude coverage for loss incurred in connection with a
7
Id. § III(D).
8
Id. § I(N).
9
Id. § III(B)(1).
6
claim that arises from or is related to Wrongful Acts challenged in litigation that
predated, or was pending as of, June 30, 2017. The PPL exclusion in the Ironshore
and Starr policies provides:
[T]his Policy shall not cover any loss in connection with any Claim
alleging, arising out of , based upon or attributable to, as of June 30,
2017[,] and pending or prior (1) litigation; . . . including any Claim or
loss alleging or derived from the same or essentially the same facts, or
the same or related act(s), error(s), omission(s) or Wrongful Act(s), as
alleged in such pending or prior litigation . . . .10
The PPL exclusion in the National Union policy contains different language, which
National Union contends is broader than the Ironshore/Starr exclusion:
[T]he Insurer shall have no liability to make any payment in connection
with any pending or prior litigation as of [June 30, 2017] or alleging or
derived from the same or essentially the same facts as alleged in such
pending or prior litigation.11
Defendants take the position that several actions filed in 2016 against or involving
the NAI Policyholders preclude coverage for the Merger Litigation under the
Policies’ exclusions and Interrelated Wrongful Acts clause.
B. The 2016 Litigation
Defendants allege the Merger Litigation “relate[s] to and involve[s] Ms.
Redstone’s alleged scheme to consolidate power over NAI, Viacom, and CBS for
the purpose of forcing the combination of CBS and Viacom.”12 Defendants identify
10
Id. Ex. C, Endorsement 4; Id., Ex. D, Endorsement 5.
11
Nat’l Union Answ. and Affirmative Defenses at 45-46.
12
Defs.’ Answ. Br. in Opp. to Pls.’ Mot. to Dismiss at 5.
7
four lawsuits filed in 2016 that they claim also relate to this scheme: an action in
Massachusetts, an action in California, and two actions in the Delaware Court of
Chancery (collectively, the “2016 Actions”).13
The Massachusetts action, styled Dauman v. Redstone, was filed in probate
court in Norfolk, Massachusetts (the “Dauman Action”).14 In that action, Phillippe
Dauman and George Abrams challenged their removal as directors of NAI and
trustees of the trust that controls NAI. The Dauman plaintiffs alleged Sumner
Redstone was suffering from “profound” physical and mental ailments, and Ms.
Redstone “manipulated her father” to assume control of his businesses.15 The
plaintiffs averred Ms. Redstone’s actions, if left unchecked, would effect an
“unlawful corporate takeover” and allow her to exercise control over Sumner
Redstone’s companies against his wishes.16 Mr. Redstone responded to the Dauman
Action by filing an action in California, In re Sumner M. Redstone National
13
Id. at 12-15. Plaintiffs’ Opening Brief also refers to three lawsuits filed in 2018, but Defendants
do not refer to that litigation in their response to the Motion. The Court therefore assumes
Defendants are not relying on those 2018 actions for purposes of their coverage denial.
14
Dauman v. Redstone, et al., No. 16-E0020QC (Mass. Probate and Fam. Ct.); See Aff. of Carla
Jones, Esq. in Supp. of Pls.’ Mot. to Dismiss, Ex A. Under settled Delaware law, the Court may
take judicial notice of the pleadings filed in the various jurisdictions. See Aequitas Sols., Inc. v.
Anderson, 2012 WL 2903324, at *3 n. 17 (Del. Ch. July 10, 2012) (holding that the court may take
judicial notice of a declaration because it was a pleading filed in a California bankruptcy
proceeding); In re Wheelabrator Tech. Inc. S’holders Litig., 1992 WL 212595, at *12 (Del. Ch.
Sept. 1, 1992) (holding that “publicly filed documents . . . are judicially noticeable on a motion to
dismiss.”).
15
Dauman, No. 16-E0020QC (Mass. Probate and Fam. Ct.); See Aff. of Carla Jones, Esq. in Supp.
of Pls.’ Mot. to Dismiss, Ex A ¶¶ 6-8.
16
Dauman, No. 16-E0020QC (Mass. Probate and Fam. Ct.); See Aff. of Carla Jones, Esq. in Supp.
of Pls.’ Mot. to Dismiss, Ex A ¶ 9.
8
Amusements Trust (the “SMR Trust Action”).17 In that action, Mr. Redstone sought
an order confirming the validity of Dauman’s and Abrams’ removal as trustees.
In June 2016, Frederic Salerno filed an action under 8 Del. C. § 225(a) in the
Delaware Court of Chancery (the “Salerno Action”).18 Salerno sought a judicial
determination of the validity of a written consent purporting to amend Viacom’s
bylaws and remove five individuals, including Salerno, as Viacom directors. The
Salerno Action alleged Ms. Redstone had taken advantage of a decline in Sumner
Redstone’s health to obtain control of his assets, including NAI, CBS, and Viacom.19
Among other allegations, Salerno alleged Ms. Redstone’s actions were interfering
“with the Board’s ability to explore value enhancing alternatives, such as a possible
transaction involving Paramount Pictures, to the detriment of [Viacom’s]
stockholders.”20
The Dauman, Salerno, and SMR Trust actions settled in August 2016. Under
the terms of that settlement, Viacom’s President and CEO resigned from their
positions and the directors purportedly hand-selected by Ms. Redstone remained on
the Viacom and NAI boards. In the settlement, Viacom agreed to defend and
indemnify Ms. Redstone, NAI, and NAIEH for all claims arising from or relating to
17
In re Sumner M. Redstone Nat’l Amusements Trust, No. 16STPB00618 (Cal. Super. Ct); See
Aff. of Carla Jones, Esq. in Supp. of Pls.’ Mot. to Dismiss, Ex B.
18
Salerno v. Nat’l Amusements, Inc., Del. Ch., C.A. No. 12473-CB.
19
Id., Compl. ¶¶ 12-16.
20
Salerno, Del. Ch., C.A. No. 12473-CB, Compl. ¶ 18.
9
those three actions or “any other stockholder actions, securities disclosure actions or
stockholder derivative actions arising from similar facts and circumstances.” 21 The
parties to the settlement agreement also entered into mutual releases with respect to
the claims at issue in those cases, including “any and all claims” arising out of the
proposed 2016 merger.22
Finally, in July 2016, one of Viacom’s Class B (non-voting) stockholders filed
an action on behalf of Viacom’s Class B stockholders in the Delaware Court of
Chancery (the “Class B Litigation”).23 The complaint in the Class B Litigation
originally alleged Sumner Redstone, Ms. Redstone, NAI, and NAIEH breached their
fiduciary duties by purporting to amend Viacom’s bylaws and by removing
Viacom’s independent directors and replacing them with directors loyal to Ms.
Redstone. The original complaint alleged these actions limited Viacom’s ability to
explore and agree to a transaction involving Paramount Pictures.24 After the August
settlement of the Dauman, Salerno, and SMR Trust actions, the plaintiffs amended
the complaint and alleged Ms. Redstone was attempting to wield her control of NAI
to propose a CBS-Viacom merger.25 According to the amended complaint, the letter
NAI sent CBS and Viacom proposing the merger “insist[ed] on one and only one
21
See, e.g., Endurance Answ., Affirmative Defenses and Countercl. ¶ 30.
22
In re Viacom Inc. S’holders Litig., 2020 WL 7711128, at *17 n.197 (Del. Ch. Dec. 30, 2020).
23
In re Viacom Class B S’holder Litig., Del. Ch., C.A. No. 12545-CB.
24
Id., Compl. ¶ 90.
25
In re Viacom Class B, Del. Ch., C.A. No. 12545-CB, Am. Compl. ¶¶ 9-10.
10
strategic deal to the exclusion of all other deals that might yield more for the Viacom
stockholders.”26 The Class B Litigation was dismissed by stipulation in July 2017.27
C. The Merger Litigation
On August 13, 2019, CBS and Viacom announced they had agreed to combine
the two companies in a transaction under which each Viacom share would be
exchanged for 0.59625 shares of CBS (the “Merger”).28 The Merger closed in
December 2019. The Merger’s announcement prompted a flurry of lawsuits filed
by Viacom stockholders in the Delaware Court of Chancery that ultimately were
consolidated in a single case styled In re Viacom Stockholder Litigation (the
“Viacom Merger Litigation”). The complaint in that case alleged the Merger was
the culmination of a four-year process, spearheaded by Ms. Redstone, “to assume
control of the media empire [Sumner Redstone] built so that she can re-unify (and
consolidate control over) the two Redstone ‘family’ businesses.”29 The complaint
in the Viacom Merger Litigation detailed the events that were challenged in the 2016
Actions, including the removal of five Viacom directors and NAI’s proposal to
combine the companies in 2016, which ultimately was unsuccessful.30 The
26
In re Viacom Class B, Del. Ch., C.A. No. 12545-CB, Am. Compl. ¶ 9.
27
In re Viacom Class B, 2017 WL 2937810 (Del. Ch. July 7, 2017).
28
In re Viacom Inc. S’holder Litig., Del. Ch., Consol. C.A. No. 2019-0948 SG, Compl. ¶ 9.
29
Id., Compl. ¶ 2.
30
Id., Compl. ¶¶ 3, 61-64.
11
complaint described continued efforts after 2016 to pursue a merger between CBS
and Viacom, which finally succeeded in 2019.31
The Viacom complaint alleges the defendants breached their fiduciary duties
to Viacom’s stockholders by favoring NAI’s and Ms. Redstone’s interests to the
detriment of other Viacom’s stockholders. The stockholder plaintiffs contend the
Viacom board and special committee were dominated by directors loyal to Ms.
Redstone. Those boards, the stockholders allege, ultimately approved an exchange
ratio for the Merger that did not give Viacom stockholders fair value for their
holdings.
Not to be outdone, CBS stockholders also challenged the Merger through a
series of actions filed in the Court of Chancery and consolidated into In re CBS
Corporation Stockholder Class Action and Derivative Litigation (the “CBS Merger
Litigation”).32 Like the Viacom complaint, the complaint in the CBS Merger
Litigation recounts the events that were the subject of the 2016 Actions, including
Ms. Redstone’s assumption of control of NAI, CBS, and Viacom and the
unsuccessful proposed combination in 2016.33 As in Viacom, the CBS plaintiffs
allege the CBS defendants breached their fiduciary duties by approving the Merger,
31
Id., Compl. ¶¶ 63, 194.
32
In re CBS Corp. S’holder Class Action and Derivative Litig., Del. Ch., Consol. C.A. No. 2020-
0111 SG.
33
Id., Compl. ¶¶ 1, 49, 155.
12
but the CBS plaintiffs maintain the transaction overvalued and “bail[ed] out”
Viacom.
The CBS Complaint avers Ms. Redstone’s and NAI’s conduct “re-made the
[CBS] board of directors and senior management . . . eliminating opposition to a
combination of CBS and Viacom,” and “finally forced through [Ms. Redstone’s]
desired merger” “after years of persistent and aggressive efforts.” 34 The Complaint
also alleges the CBS defendants failed to disclose in the Merger proxy that CBS and
Viacom discussed possibly combining in 2016 and 2018 and that, when the 2016
merger did not succeed, Ms. Redstone “threatened CBS directors that she would get
the merger done even if she had to find another way.”35
The Court of Chancery considered but ultimately denied motions to dismiss
the complaints in the Merger Litigation. The decisions denying the motions to
dismiss include a discussion of the events in 2016 that were the subject of the 2016
Actions and the stockholder plaintiffs’ allegation that “Ms. Redstone initiated a
campaign to consolidate the media empire her father had built” that culminated in
the Merger.36 In its decision in the Viacom case, the Court of Chancery specifically
found that the NAI Policyholders’ “past conduct [was] relevant in that, according to
34
Id., Compl. ¶¶ 1, 3.
35
Id., Compl. ¶ 168.
36
In re Viacom, 2020 WL 7711128, at *2; see also In re CBS, 2021 WL 268779, at *1-2 (Del. Ch.
Feb. 4, 2021).
13
[the p]laintiffs, [it] set[s] the stage for NAI’s actions with respect to the Merger.”37
On the other hand, the Vice Chancellor emphasized that the plaintiffs “are not
bringing claims relating to the [2016 events] that are the subject of the release [in
the 2016 settlement agreement]. They are stating facts relating to those transactions
to support new claims regarding a new transaction.”38
Defendants also allege in their counterclaims that Ms. Redstone demanded
advancement and indemnification under the 2016 settlement agreement.39 That
settlement agreement, according to Defendants, required ViacomCBS to defend and
indemnify the NAI Policyholders “for any claims arising out of or relating to the
2016 Actions, ‘or any other stockholder actions, securities disclosure actions, or
shareholder derivative actions arising from similar facts and circumstances.’”40
Defendants aver that this demand demonstrates the NAI Policyholders’
understanding that the Merger Litigation relates back to the facts and circumstances
that gave rise to the 2016 Actions.41
The Merger Litigation is well-advanced in the Court of Chancery. According
to the information counsel in this action provided to the Court during oral argument,
both cases are scheduled for trial this year.
37
In re Viacom, 2020 WL 7711128, at *17 n.197.
38
Id.39
Endurance Countercl. ¶ 9; See also Starr Countercl. ¶ 9.
40
Endurance Countercl. ¶ 9.
41
Id.14
D. Procedural Background
The NAI Policyholders made claims to Defendants seeking coverage for the
Merger Litigation. After Defendants refused to provide coverage for several
independent reasons, the NAI Policyholders filed this action seeking a declaratory
judgment that the Policies afford coverage for the NAI Policyholders’ losses in
connection with the Merger Litigation.42 Defendants answered the complaint and
asserted various affirmative defenses, including defenses based on the Interrelated
Wrongful Acts clause, the Prior Notice Exclusion, and the PPL Exclusions.
Endurance, Starr, and Ironshore also asserted counterclaims based on those same
policy provisions.
The NAI Policyholders moved to dismiss the counterclaims under Rule
12(b)(6) for failure to state a claim and moved to strike some of the affirmative
defenses under Rule 12(f) as legally insufficient. The NAI Policyholders seek to
dismiss all the counterclaims asserted by Endurance, Starr, and Ironshore, and seek
to strike Endurance’s third and fourth affirmative defenses, Ironshore’s third, fourth,
and tenth affirmative defenses, Starr’s third, fourth, and sixth affirmative defenses,
and National Union’s fourth, fifth, and ninth affirmative defenses.43 The parties
42
Viacom, NAI, and Ms. Redstone also sought coverage under Viacom’s directors’ and officers’
liability insurance policies for the losses they have incurred or may incur in connection with the
Merger Litigation. This Court previously denied the defendant insurers’ motions to dismiss those
declaratory judgment actions as unripe. See Viacom Inc. v. U.S. Specialty Insur. Co., 2023 WL
2034445 (Del. Super. Feb. 16, 2023).
43
Pls.’ Op. Br. in Supp. of Mot. to Dismiss and Mot. to Strike at 13, n.7.
15
briefed and argued the motions on January 25, 2023, and the Court took the motions
under advisement.
E. The Parties’ Contentions
The NAI Policyholders contend Defendants’ counterclaims must be dismissed
because the Merger Litigation constitutes a claim first made in 2019. The NAI
Policyholders argue the Merger Litigation and the 2016 Actions are not Interrelated
Wrongful Acts because there is no “meaningful linkage” between the two sets of
claims, and the 2016 Actions are mere “background facts” in the Merger Litigation.
According to the NAI Policyholders, the Court should consider the nature of the
alleged Wrongful Acts, the legal theories advanced in each of the actions, the nature
of the relief sought in the two groups of cases, and the alleged evidentiary bases for
the claims, all of which support the conclusion that the 2016 Actions and the Merger
Litigation are not based on Interrelated Wrongful Acts.
Since the claims are not interrelated, the NAI Policyholders continue, they
necessarily cannot be barred under the PPL Exclusions or the Prior Notice
Exclusion, both of which require the same “meaningful linkage” analysis, but which
also are subject to the rule of construction requiring insurance policy exclusions to
be interpreted narrowly. Therefore, the NAI Policyholders argue the Court also
should strike as legally insufficient the affirmative defenses based on the Interrelated
Wrongful Acts clause or the associated exclusions.
16
Defendants respond that, under Delaware’s minimal pleading standard, they
have stated a conceivable claim that coverage is precluded under either the
Interrelated Wrongful Acts clause or the exclusions at issue in the motion.
Defendants argue the NAI Policyholders cannot establish with reasonable certainty
that Defendants are not entitled to declaratory judgment in their favor under any set
of facts susceptible of proof. Dismissal, Defendants urge, would be premature, and
some amount of discovery is needed before the Court can determine whether the
claims are interrelated or fall within the exclusions.
Even if the Court considers the merits of the NAI Policyholders’
counterclaims and affirmative defenses now, Defendants argue the Merger
Litigation and the 2016 Actions are Interrelated Wrongful Acts under the plain
language of the Policies. Defendants contend the Interrelated Wrongful Acts clause
sweeps broadly and applies to all claims “arising out of” the Wrongful Acts at issue
in the 2016 Actions, including the “series of related facts” that Defendants contend
led from the 2016 Actions to the Merger. Ms. Redstone’s reconstitution of the NAI
and Viacom boards was, according to Defendants, the “fundamental initial step” in
her alleged scheme to force a Viacom-CBS merger. Applying that same analysis,
Defendants argue the PPL and Prior Notice Exclusions also bar coverage. Finally,
Defendants argue their affirmative defenses should not be stricken because they are
relevant to the NAI Policyholders’ claims and are not prejudicial.
17
ANALYSIS
Under Delaware Superior Court Civil Rule 12(b)(6), dismissal is appropriate
when the complaint fails to state a claim upon which relief can be granted. 44 When
the Court considers a motion to dismiss, it must: “(1) accept all well pleaded factual
allegations as true, (2) accept even vague allegations as ‘well pleaded’ if they give
the opposing party notice of the claim, (3) draw all reasonable inferences in favor of
the non-moving party, and (4) [not dismiss the claim] unless the plaintiff would not
be entitled to recover under any reasonably conceivable set of circumstances.”45
Delaware’s pleading standard is “minimal,”46 but the liberal construction
afforded to the complaint does not “extend to ‘conclusory allegations that lack
specific supporting factual allegations.’”47 Accordingly, the Court should dismiss a
complaint if the plaintiff fails to make specific allegations supporting each element
of a claim or if no reasonable interpretation of the alleged facts reveals a remediable
injury.48
Under Rule 12(f), this Court “may order stricken from any pleading any
insufficient defense or any redundant, immaterial, impertinent, or scandalous
44
See Del. Super. Ct. Civ. R. 12(b)(6).
45
Cent. Mortg. Co. v. Morgan Stanley Mortg. Cap. Hldgs. LLC, 27 A.3d 531, 535 (Del. 2011).
46
Id. at 536.
47
Surf’s Up Legacy P’rs, LLC v. Virgin Fest, LLC, 2021 WL 117036, at *6 (Del. Super. Jan. 13,
2021) (quoting Ramunno v. Cawley, 705 A.2d 1029, 1034 (Del. 1998)).
48
Axogen Corp. v. Integra LifeSciences Corp., 2021 WL 5903306, at *2 (Del. Super. Dec. 13,
2021) (citing Surf’s Up Legacy P’rs, LLC, 2021 WL 117036, at *6).
18
matter.”49 The standard for a motion to strike an affirmative defense as insufficient
is similar to the Rule 12(b)(6) standard; when considering a motion under that rule,
the Court “must construe all facts in favor of the nonmoving party and deny the
motion if the defense is sufficient under law.”50 Motions to strike are granted
“sparingly” and are not favored.51
I. Plaintiffs’ Motion to Dismiss and Strike relating to the Interrelated
Wrongful Acts clause and the PPL Exclusions must be denied
because it is reasonably conceivable that the 2016 Actions and 2019
Merger Litigation involve Interrelated Wrongful Acts.
It is settled law that Delaware views insurance policies as contracts and
applies established principles of contract construction to interpret those policies.52
The scope of coverage provided by an insurance policy is prescribed by the policy
language’s ordinary meaning.53 The Delaware Supreme Court has expressly rejected
any “one-size-fits-all” judicial test for determining whether claims are related for
purposes of resolving coverage questions.54 Instead of a judicially crafted test,
Delaware courts determine relatedness based on the language in the particular policy
at issue.55
49
Super. Ct. Civ. R. 12(f).
50
Nichols v. Chrysler Gp. LLC, 2010 WL 5549048, at *5 (Del. Ch. Dec. 29, 2010).
51
Salem Church (Del.) Assocs. V. New Castle Co., 2004 WL 1087431, at *2 (Del. Ch. May 6,
2004).
52
See, e.g., Monzo v. Nationwide Property & Casualty Insur. Co., 249 A.3d 106, 118 (Del. 2021);
In re Solera Ins. Coverage Appeals, 240 A.3d 1121, 1131 (Del. 2020).
53
O’Brien v. Progressive N. Insur. Co., 785 A.2d 281, 286-88 (Del. 2001).
54
First Solar, Inc. v. Nat’l Union Fire Insur. Co. of Pittsburgh, PA, 274 A.3d 1006, 1013 (Del.
2022).
55
Id. at 1013.
19
The parties devoted a substantial portion of their briefs to parsing the meaning
of the Interrelated Wrongful Acts clause and the PPL Exclusions based on the
language contained in the Policies. The NAI Policyholders argued the Court should
hold that the Policies require “meaningful linkage” between claims for those actions
to fall within the Interrelated Wrongful Acts clause or the PPL Exclusions. That
“meaningful linkage” analysis was used by this Court in two relatively recent
decisions based on the language and phrasal verbs contained in the policies at issue
in those cases.56 There are some differences between the policy language in those
cases and the applicable language in these Policies. Whether those differences
change the analysis in any substantial respect is a question that ultimately will be
answered by the Court. But the question is premature because the procedural posture
of this case, the standard of review, and the unusual facts alleged in the counterclaim
require further development of the record before the Court may confidently apply
the contractual language and determine coverage.
The NAI Policyholders’ argument that the 2016 Actions and the Merger
Litigation are not based on Interrelated Wrongful Acts and do not fall within the PPL
Exclusion is a compelling one. There are substantial differences between the Merger
Litigation, which challenges the fairness of the merger price, and the 2016 Actions,
56
Options Clearing Corp. v. U.S. Specialty Insur. Co., 2021 WL 5577251, at *8 (Del. Ch. Nov.
30, 2021); Sycamore P’rs Mgmt., L.P. v. Endurance Am. Insur. Co., 2021 WL 4130631, at *12
(Del. Super. Sept. 10, 2021).
20
which questioned Sumner Redstone’s capacity and challenged a variety of board
governance and control decisions that were proposed or employed in and around
2016. Among other differences, the two groups of actions made different claims,
sought different relief, and challenged conduct occurring in different time periods.
In addition, the Court of Chancery already expressly concluded that the plaintiffs in
the Merger Litigation were not bringing claims relating to the 2016 Actions, but
simply “stating facts relating to those actions” to support their new claims.57
Defendants argue that the corporate control actions in 2016 “culminated” in
the 2019 Merger, but that argument—taken to its logical conclusion—could render
coverage illusory, an interpretation at odds with settled Delaware law.58 Although
the 2016 corporate control actions could in a sense be viewed as a proximate cause
of the 2019 Merger, since those control decisions resulted in the boards that
approved the Merger, the same arguably could be said of any corporate decision
made by those boards. If any board decision is interrelated with the 2016 Actions,
the NAI Policyholders effectively have no D&O coverage at all, despite paying
annual premiums to Defendants for that coverage.
On the other hand, this coverage issue presently is before the Court on a
motion to dismiss. Although the motion relates to Defendants’ counterclaims and
57
In re Viacom, 2020 WL 7711128, at *17 n.197.
58
Insurance coverage provisions should be construed broadly to safeguard the insured’s reasonable
expectation of broad coverage. See RSUI Indem. Co., v. Murdock, 248 A.3d 887, 906 (Del. 2021).
21
affirmative defenses, the NAI Policyholders, as the insureds, have the burden of
proving that a claim is covered by the Policies.59 In order to overcome a motion to
dismiss in this context, Defendants need only plead a “reasonably conceivable set of
circumstances” under which the NAI Policyholders would be unable to show that
Defendants are obligated to cover the Merger Litigation under the Policies.
In addition to the “minimal” pleading standard Defendants must meet, the
record does not permit a complete analysis of whether the claims are related. As a
general matter, courts in Delaware look to the relevant pleadings to determine
whether actions are related for purposes of insurance coverage.60 But a recent
Delaware Supreme Court decision, First Solar, Inc. v. National Union Fire
Insurance Company, suggests that—at least where there is doubt as to relatedness—
a court may look beyond the pleadings and consider statements an insured made that
are inconsistent with its current coverage position.61
59
E.I. du Pont de Nemours & Co. v. Allstate Ins. Co., 693 A.2d 1059, 1061 (Del. 1997).
60
See, e.g. First Solar, Inc., 274 A.3d at 1014 (making a side-by-side comparison of the two
complaints alleged to be related); Options Clearing Corp., 2021 WL 5577251, at *10 (denying
Rule 56(f) request for discovery because courts determine relatedness based on the pleadings or
related formal documents); Providence Serv. Corp. v. Ill. Union Insur. Co., 2019 WL 3854261, at
*3 (“When determining whether actions are ‘related,’ courts compare the allegations in the
complaints to determine their similarities and differences.”).
61
First Solar, Inc., 274 A.3d at 1017 (“Finally, if there is any remaining doubt about relatedness .
. . we can rely on what First Solar said about the two Actions when insurance coverage was not at
issue. First Solar agreed in another matter that the Actions were nearly identical . . . and filed a
[motion in which it] argued that ‘the substantial overlap in legal and factual issues and the
substantial overlap in parties weigh in favor of transferring [the second action] to this Court.’”).
22
In this case, there are two reasons the Court cannot resolve the applicability
of the Interrelated Wrongful Acts clause and the PPL Exclusions on the present
record. First, the complaints in the Merger Litigation were filed under seal, and the
NAI Policyholders have not provided unredacted copies of the complaints to
Defendants. Although Defendants concede they understand the basis of the claims
pleaded in those complaints, Defendants should in fairness have access to the
unredacted complaints before the Court concludes the Interrelated Wrongful Acts
clause and the PPL Exclusions do not apply.
Second, Defendants’ counterclaims allege the NAI Policyholders took
positions inconsistent with their current coverage position when they (1) argued to
the Court of Chancery that the Merger Litigation was barred by the releases granted
in the 2016 settlements; and (2) sought indemnification for the Merger Litigation
under the 2016 settlement agreements. Although the argument to the Court of
Chancery regarding the scope of the releases ultimately was not successful, and
therefore likely does not estop the NAI Policyholders’ coverage claims here,62 the
indemnification claim may fall within the considerations arguably permitted by First
Solar. Defendants therefore should be allowed limited discovery relating to those
62
See Motorola Inc. v. Amkor Tech., Inc., 958 A.2d 852, 859-60 (Del. 2008) (holding that judicial
estoppel functions in two ways: (1) to prevent a party from attempting to establish an inconsistent
or different cause of action arising out of the same occurrence, and (2) to prevent a party from
“advancing an argument that contradicts a position previously taken that the court was persuaded
to accept as the basis for its ruling.” (emphasis added)).
23
indemnification claims before the Court considers the Interrelated Wrongful Acts
clause and the PPL Exclusions.
II. Plaintiffs’ Motion to Dismiss and Strike relating to the Prior Notice
Exclusion is granted because the plain language of that exclusion
does not apply to the facts of this case.
Defendants also asserted counterclaims and affirmative defenses based on the
Policies’ Prior Notice Exclusion. The Prior Notice Exclusion applies to claims for
loss relating to a Wrongful Act or Interrelated Wrongful Act that “was the subject
of any notice given under any other policy of insurance” that the Policies renewed
or replaced.63 Importantly, however, the exclusion only applies if (1) the notice was
given “before the Inception Date” of the Policies; and (2) coverage is afforded and
accepted as a result of the notice.64 The Policies’ Inception Date was December 30,
2018.65
The facts Defendants pleaded in their counterclaims establish that notice
under the NAI Policyholders’ previous D&O insurance program was not given
before the Policies’ Inception Date. The “prior notice” on which Defendants rely is
notice Plaintiffs allegedly gave National Union as the primary carrier in NAI’s 2016
63
Starr Answ. Ex. B, Management and Professional Liability Coverage Part, § III(B)(1) (“The
Insurer shall not pay Loss from any Claim based upon, arising out of, directly or indirectly resulting
from, on consequence of, or in any way involving any Wrongful Act or Interrelated Wrongful Act
which, before the Inception Date of this Policy, was the subject of any notice given under any other
policy of insurance which this Policy is a renewal or replacement, but only if coverage is afforded
or accepted under such prior policy (or would have been afforded and accepted except for the
exhaustion of its limits of liability) for such Loss, in whole or in part, as a result of such notice.”)
64
Id.
65
Id., Declarations Item 2; id. General Terms and Conditions, § I(U).
24
D&O insurance tower.66 That notice, however, was not sent until after Defendants
denied coverage for the Merger Litigation under the Policies.67 The first coverage
denial was not given until February 2020 at the earliest.68 Accordingly, even if
National Union “accepted” coverage as Defendants allege,69 that acceptance was
neither based on notice given before the Inception Date nor coverage accepted “as a
result of such [pre-inception date] notice.”
To the extent Defendants’ counterclaims seek a declaratory judgment that
coverage is barred under the Prior Notice Exclusion, the plain language of the
Exclusion does not apply to the facts as Defendants pleaded them, and those claims
therefore must be dismissed under Rule 12(b)(6). For the same reason, Defendants’
affirmative defenses based on the Prior Notice Exclusion must be stricken as legally
insufficient.70
CONCLUSION
For the foregoing reasons, the NAI Policyholders’ Motion to Dismiss and to
Strike is GRANTED as to the counterclaims and affirmative defenses based on the
66
Endurance Countercl. ¶ 76; Starr Countercl. ¶ 80; Ironshore Countercl. ¶ 80.
67
Endurance Countercl. ¶ 76; Starr Countercl. ¶ 80; Ironshore Countercl. ¶ 80.
68
Starr Countercl. ¶ 77.
69
It remains unclear from the record whether the plaintiffs gave notice under the 2016 policies, or
whether National Union instead unilaterally accepted coverage under the 2016 policies in response
to the NAI Policyholders notice under the 2018-19 policies. This factual issue is not relevant to
the Court’s decision on the motion to dismiss.
70
See Columbus Life Ins. Co. v. Wilmington Trust Co., 2021 WL 537117, at *9 (Del. Super. Feb.
15, 2021) (striking affirmative defense after dismissing related counterclaim); James River-
Pennington Inc. v. CRSS Cap., Inc., 1995 WL 106554, at *12 (Del. Ch. Mar. 6, 1995) (same).
25
Prior Notice Exclusion and DENIED as to the counterclaims and affirmative
defenses based on the Interrelated Wrongful Acts clause and the PPL Exclusions.
IT IS SO ORDERED.
26